Friday, April 27, 2012

GNC: Supplements

GNC Holdings Inc. (GNC) sells supplements for nutrition and sports performance from 7,600 locations in 53 countries and online.

The Pittsburgh, Pennsylvania company's website today shows grimacing guys in shades on bikes, illustrating the sports emphasis of the chain's image-making.

GNC had the most bullish chart among 21 stocks added today to the Zacks top-buy list.

GNC Holdings beat earnings estimates by 16.2% in an announcement on Wednesday, and the price responded with a 9.5% opening gap.

But the stock has been in an uptrend been since the company went public a  year ago, with one major correction. The most recent leg up began Jan. 27 from $26.12 and has risen to today's all-time high of $41.95.

It is a very bullish chart, but with the caveat that there is not a lot of history to this newly public company. There is no way of knowing how its price will behave under severe stress, such as the economy experienced in the 2008/2009 crash.

GNC Holdings has return on equity of 22%, with long-term debt equal to 85% of equity. The return is in growth-stock territory, but the high debt is a serious risk to long-term growth.

Institutions own nearly all of the shares and have bid up the price so that it takes $1.95 in shares to control a dollar in sales.

The four quarters of earnings now available show no pattern. But there is too little data to look for any evidence of seasonality, so there may be a longer term pattern that has yet to emerge.

GNC trades 2.3 million shares on average. That supports a modest selection of option strike prices, but with high open interest and narrow bid/ask spreads.

The price spreads get a little too wide for my taste in the out-months, and the $5 strike price interval surrounding the at-the-money level makes it difficult to construct a reasonable spread.

Implied volatility stands at 48.5%, significantly above the six-month low of 39% but well below that period's high of 85%. It has been tracking sideways since early April.

Traders are pricing in a 68.2% chance that the stock will close between $35.70 and $47.32 a month from now, for a maximum gain or loss of 14%.

GNC Holdings next publishes earnings on July 26. The stock will go ex-dividend sometime in June, most likely, for a quarterly payout yielding 1.05% annualized.

Decision for my account: I would be willing to play GNC as shares or call options. The structure of the options inventory makes spreads too problematic for my taste. And I prefer spreads. They let me define the potential loss more precisely than singles do, and also let me make money if the price goes nowhere, neither rising nor falling.

Also, the upward gap and new high today suggests to me that GNC is ready for some profit-taking by short-term traders. 

So I'll wait until next week before deciding whether to open a position.

I screened the stocks using a tourney bracket with a one-month daily chart and a three-day half-hour chart, and then turned to a five-year weekly chart for the broad context in analyzing the bracket winner. See my essay "10,000 Charts" for a discussion of my screening methods.

Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.

No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decision decisions for his or her own account, and take responsibility for the consequences.

No comments:

Post a Comment